A Big Thumbs Up for eBay's Options Plan

The leading proxy adviser endorses the company's proposal to dramatically increase the number of stock options.

eBay's ( EBAY) proposal to give managers significantly more stock options got an unexpected vote of confidence Wednesday from the the nation's leading proxy adviser.

Institutional Shareholder Services recommended that shareholders vote for eBay's options plan this year, despite saying last year that investors should vote down similar increases in the number of shares eBay can grant as options.

The proposal comes as stock options are under scrutiny by investors, accounting experts and public-policy makers. Because stock options tend to reward employees and managers for short-term stock fluctuations, options have been linked to corporate scandals at Enron and WorldCom, where questionable or illegal steps allegedly were taken to boost share prices.

Yet eBay shows no signs of letting up on its options binge, despite the scrutiny.

The company's board is asking shareholders to approve a greater-than-50% increase in the number of shares the company can award under its current stock-option plan for employees and managers. The proposed increase, some 14 million shares, is tantamount to about 4% of the company's outstanding shares. Shareholders approved similarly sizable increases in each of the last two years. They'll have a chance to vote on this proposal at the company's annual meeting in Orlando on June 26.

Company representatives didn't return calls seeking comment about the proxy vote or the ISS recommendation.

ISS is basically the only game in town when it comes to proxy recommendations for institutional investors, and its recommendation may well carry weight with investors. So what's behind the change of heart at ISS? This year's run-up in eBay shares means the cost of the options comes in below a cap set by ISS according to a proprietary formula it uses. Also, eBay has promised to seek shareholder approval before repricing the options.